Inflation fears are looming, and experts say the markets are not ready to accept higher interest rates, which is putting the Fed in a tough spot. Economist Nouriel Roubini warns that if the Fed raised interest rates, trying to control inflation, the market may see a return of 2013’s “taper tantrum.” Other economists, like Dana Peterson, say now is not the time for Fed policymakers to raise rates or start reversing its easy monetary policy, especially after the disappointment of April’s jobs report.

 

Kitco News/Kitco News
Roubini: The Fed is ‘cornered’; will either lose control of inflation or crash markets

While inflationary fears are picking up, the markets have not demonstrated a readiness to accept higher interest rates. In fact, rising nominal treasury yields over the past few months have, on several occasions, prompted market selloffs.

This predicament puts the Federal Reserve in a tough position, said Nouriel Roubini, CEO of Roubini Macro Associates and professor at the NYU Stern School of Business, because should the Fed raise interest rates to try to control inflation, the market may see a return of 2013’s “taper tantrum.”

“Either the Fed, at that point, keeps on saying things are temporary, inflation expectations start to rise, they control the short end of the yield curve, but then long rates can rise in nominal and real terms, that’s one risk. Then, inflation gets out of control. Or, like in 2013, they have to backpedal and say no, there is a problem with inflation and we have to start tapering sooner than we said, we need to start raising rates sooner than we said, and we could have a repeat of what happened in 2013,” Roubini told Michelle Makori, Kitco’s editor-in-chief.

In 2013, when the Fed announced a reduction in its pace of Treasury bond purchases, U.S. Treasury yields soared on the announcement.

A repeat of this scenario could have serious implications for all markets, if not the broader economy, Roubini said, noting that the fixed income sector is particularly at risk.

“So either way is risky. Either you’re behind the curve, you’re going to cause inflation, or if you don’t want to be any more behind the curve, and then you signal, ‘I’m going to tighten’, then you could have a bond market and a credit market crash that could really weaken the economy, if not stall it. It’s damned if you do, damned if you don’t,” he said.

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CNN Business/Dana Peterson for CNN Business Perspectives
Opinion: April’s disappointing jobs report proves the Fed shouldn’t hike rates

Help-wanted signs are cropping up everywhere and reports of labor shortages with them. Does this mean the US has achieved the “substantial further progress” toward labor-market healing that the Federal Reserve is seeking? More importantly, is it time for Fed policymakers to start reversing their easy monetary policy and raising interest rates? The answer remains “no” to both questions.

Labor shortages are not widespread. Rather, special, and arguably temporary, factors are causing them in certain segments of the economy. “For hire” signs are plentiful in industries that have thrived during the pandemic and desperately need workers. Consumers’ hunger for goods, including cars, gaming systems, outdoor furniture and new housing are fueling high demand for laborers in industries such as manufacturing, trucking and construction. Only recently have select in-person services industries — like restaurants and hospitality — faced labor shortages, which is a function of state and local governments lifting restrictions on businesses.

But while pockets of labor shortages are grabbing the headlines, the jobs situation remains grim for millions of Americans. A disappointing 266,000 jobs were added in April, well below the 800,000 to 1 million per month needed to dramatically reduce the pandemic’s payroll-employment losses. Indeed, 8.2 million people are still jobless since February 2020 — the outset of the pandemic. Also, a little used, but important, measure of labor market health, the employment-to-population ratio, stands at 57.9% presently — a near 40-year low — compared to 61.1% pre-pandemic, according to the Bureau of Labor Statistics (BLS). This means that millions of workers are sitting idle or are completely disengaged from the labor market.

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CNBC/Abigail Ng
A major U.S. pipeline is still mostly shut due to a cyberattack. Here’s what you need to know

The United States’ largest fuel pipeline has been crippled shut since Friday after a cybersecurity attack — and it’s not clear how long the outage will last.

Wells Fargo says the restart date is key, and it outlined three scenarios for reopening that could help investors gauge the possible impact.

The operator of Colonial Pipeline fell prey to a ransomware attack on Friday, forcing all pipeline operations to stop. A Russian criminal group known as Dark Side may be responsible for the attack, NBC News reported, citing two sources familiar with the matter.

Colonial Pipeline said Sunday it is developing a system restart plan, and that some smaller lines are now operational.

The company said it will “bring our full system back online only when we believe it is safe to do so, and in full compliance with the approval of all federal regulations.”

3 scenarios

“Timing of the restart is the critical issue,” Wells Fargo analyst Roger Read said in a note on Sunday. He outlined three possible date ranges:

1. Fewer than five days: If a partial restart of the pipeline begins by Wednesday, there will be “no significant or lasting impacts.”

2. Six to 10 days: Refiners may need to reduce the amount of crude oil they process if the pipeline remains shut for up to 10 days. Inventories will rise in the U.S. Gulf Coast, causing prices to fall, while prices in the East Coast would jump, the analyst said. The East Coast is also likely to import more waterborne fuel, and spot shortages will start to take place in parts of the Southeast.

3. More than 10 days: Refiners in the Gulf Coast will almost definitely have to reduce their runs, and oil prices may weaken compared with waterborne crudes to encourage exports. “Expect significant fuel shortages in the interior Southeast of the U.S.,” Wells Fargo said in the note.

Read why it matters, here.

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